nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒09‒17
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Domestic and foreign demand for euro banknotes issued in Germany By Bartzsch, Nikolaus; Uhl, Matthias
  2. Monetary policy in a low interest rate environment By Stefano Neri; Giuseppe Ferrero
  3. Central Bank Quantitative Easing as an Emerging Political Liability By Xing, Victor
  4. The Redistributive Effects of Inflation and the Shape of Money Demand By Paola Boel
  5. Household Debt and Monetary Policy: Revealing the Cash-Flow Channel By Flodén, Martin; Kilström, Matilda; Sigurdsson, Josef; Vestman, Roine
  6. Applying complexity theory to interest rates: Evidence of critical transitions in the euro area By Jan Willem van den End
  7. The Eurosystem’s asset purchase programme and TARGET balances By Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin; Adalid, Ramón; Papsdorf, Patrick
  8. The Paper Money of Colonial North Carolina, 1712-1774 By Cory Cutsail; Farley Grubb
  9. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia
  10. Market Reactions to ECB Policy Innovations: A Cross-Country Analysis By Fausto Pacicco; Luigi Vena; Andrea Venegoni
  11. Monetary Aggregates and Monetary Policy in Peru By Erick Lahura
  12. On the Effectiveness of Central Bank Intervention in the Foreign Exchange Market: The Case of Slovakia, 1999-2007 By Juraj Zeman; Biswajit Banerjee; Ludovit Odor; William O. Riiska Jr.
  13. A composite index of inflation tendencies in the euro area By Marcello Miccoli; Marianna Riggi; Lisa Rodano; Laura Sigalotti
  14. The financial market effects of the ECB's asset purchase programs By Lewis, Vivien; Roth, Markus
  15. Is Deflation Costly After All? The Perils of Erroneous Historical Classifications By Daniel Kaufmann
  16. Segmented money markets and covered interest parity arbitrage By Dagfinn Rime; Andreas Schrimpf; Olav Syrstad
  17. The Plutocratic bias in the Indian CPI By Nachane, Dilip M; Aditi Chaubal
  18. Market Reading of Central Bankers Words. A High-Frequency Evidence. By Pavel Gertler; Roman Horvath
  19. Did quantitative easing boost bank lending? The Slovak experience By Adriana Lojschova
  20. Macroprudential Policy in a Monetary Union By Salim, DEHMEJ; Leonardo, GAMBACORTA
  21. Optimal trend inflation By Adam, Klaus; Weber, Henning
  22. Extreme Events and Optimal Monetary Policy By Francisco Ruge-Murcia; Jinill Kim
  23. Effectiveness of macroprudential policies under borrower heterogeneity By Punzi, Maria Teresa; Rabitsch, Katrin

  1. By: Bartzsch, Nikolaus; Uhl, Matthias
    Abstract: To facilitate a more detailed study of the volume of euro banknotes in circulation issued by the Deutsche Bundesbank, it is broken down into the components of foreign demand, domestic hoarding and domestic transaction balances. These banknote demand components are estimated using the direct approach “net shipments and foreign travel” as well as an indirect approach known as the “seasonal method”. According to the new estimates, which are based on a combination of the two approaches, around 65% to 70% of the arithmetical volume of euro banknotes issued by the Bundesbank were in circulation outside Germany at the end of 2015; of this figure, 40 to 50 percentage points were in circulation outside the euro area, and 20 to 30 percentage points in other euro-area countries. Between 30% and 35% of the Bundesbank’s cumulated net issuance was in circulation in Germany, of which 25 percentage points were hoarded and 5 to 10 percentage points held for transaction purposes. The newly estimated time series for domestic hoardings does not feature a noticeable break due to the euro area’s low-interest-rate environment; instead, Bundesbank-issued euro banknotes may be circulating in other euro-area countries in greater numbers.
    Keywords: Euro banknote demand,foreign demand,transaction balances,hoardings
    JEL: E41 E58
    Date: 2017
  2. By: Stefano Neri (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia)
    Abstract: The debate on the underlying causes of the decline of interest rates to historically low levels is ongoing both in academia and among policy makers. Several explanations have been put forward, ranging from those citing real and structural factors to those underscoring the importance of cyclical and financial phenomena. However, the empirical evidence regarding their relative importance is still limited. These different but complementary views can be framed around the concept of the natural rate of interest and the monetary transmission mechanism. The low interest rate environment that still characterizes advanced economies raises important questions regarding the implications for monetary policy in the medium- and long-run. Our work provides a systematic outline of the potential changes to monetary policy strategies that could ensue.
    Keywords: interest rates, natural rate, monetary policy, secular stagnation, financial cycle
    JEL: E43 E52 E58 G01
    Date: 2017–09
  3. By: Xing, Victor
    Abstract: Officials from major central banks have previously acknowledged QE programs’ distributional effects but expected aggregate economic benefits of these unconventional policies to outweigh their costs. Post-crisis asset price appreciation became well entrenched under the effect of QE, which out-paced median wage growth to unintentionally burden low-to-middle income households and individuals with limited asset ownership. Subsequently, rising inequality fueled discontent and contributed to the rise of anti-establishment political candidates Efforts by elected officials to ease the effects of policy-induced inequality would likely bolster support toward further redistribution policies such as “helicopter money” to threaten central bank monetary policy independence
    Keywords: Quantitative Easing, Distributional Effects, Helicopter Money, Debt Monetization
    JEL: E50 E52 H50
    Date: 2017–09–01
  4. By: Paola Boel
    Abstract: I quantify the redistributive effects of expected inflation in a sample of OECD countries using a microfounded model of money where agents differ in their consumption risk. The model is calibrated using harmonized wealth microdata from the Luxembourg Wealth Study. I find that inflation acts as a regressive tax in all countries considered. The magnitude of inflation’s redistributive impact, however, depends not only on wealth distribution but also, and importantly, on the shape of the money demand curve. A higher and less elastic money demand leads to more regressive effects of inflation, thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution.
    Keywords: Money,Heterogeneity,Calibration,Welfare Cost of Inflation
    JEL: E4 E5
    Date: 2017–07
  5. By: Flodén, Martin; Kilström, Matilda; Sigurdsson, Josef; Vestman, Roine
    Abstract: We examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortgages (ARMs). Using registry-based data on Swedish households, we estimate substantial heterogeneity in consumption responses to a change in monetary policy through the cash-flow channel. Our findings imply that monetary policy has a stronger effect on real economic activity when households are highly indebted and have ARMs. For homeowners with a debt-to-income ratio of around 3 and ARMs, the estimated response is equivalent to a marginal propensity to consume of 0.5.
    Keywords: adjustable rate mortgages; Consumption; Household Debt; monetary policy; variable interest rates
    JEL: D14 E21 E52 G11
    Date: 2017–09
  6. By: Jan Willem van den End
    Abstract: We apply complexity theory to financial markets to show that excess liquidity created by the Eurosystem has led to critical transitions in the configuration of interest rates. Complexity indicators turn out to be useful signals of tipping points and subsequent regime shifts in interest rates. We find that the critical transitions are related to the increase of excess liquidity in the euro area. These insights can help central banks to strike the right balance between the intention to support the financial system by injecting liquidity and potential unintended side-effects on market functioning.
    Keywords: interest rates; central banks and their policies; monetary policy
    JEL: E43 E58 E52
    Date: 2017–09
  7. By: Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin; Adalid, Ramón; Papsdorf, Patrick
    Abstract: TARGET balances have risen during the period of the Eurosystem’s asset purchase programme (APP). The APP gives rise to substantial cross-border flows of reserves at the time of asset purchases and beyond, reflecting the interaction of decentralised monetary policy implementation and the integrated euro area financial structure. This financial structure, in which only a handful of locations act as gateways between the euro area and the rest of the world, leads to rising TARGET balances at the time of APP purchases and the persistence of TARGET balances in the context of subsequent portfolio rebalancing. TARGET balances per se are not necessarily an indicator of stress in bank funding markets, financial market fragmentation or unsustainable balance of payments developments. JEL Classification: E58, G02, F32
    Keywords: asset purchase programme, balance of payments, excess liquidity, financial structure, TARGET2
    Date: 2017–09
  8. By: Cory Cutsail; Farley Grubb
    Abstract: Beginning in 1712, North Carolina’s assembly emitted its own paper money and maintained some of its paper money in public circulation for the rest of the colonial period. This paper money has been reviled as an archetype of what was bad about the paper monies issued by American colonial legislatures. Yet little systematic analysis of North Carolina’s paper money has been undertaken. We correct that here. We reconstruct North Carolina’s paper money regime from original sources—providing yearly quantitative data on printings, net new emissions, redemptions and removals, amounts remaining in circulation, denominational structure, as well as the paper money’s current market value in pounds sterling. We identify different paper money regimes based on how the assembly structured and executed its paper money laws. We model and estimate how the market value of this money was determined. We compare the quantity theory of money with an asset-pricing model that treats the money as zero-coupon bonds to see which explains the observed market value of the paper money better. The asset-pricing model wins by a mile. Finally, we explore counterfactual redemption architectures to show how redemption affected monetary performance in periods of value collapse.
    JEL: E42 E51 G12 N11 N21
    Date: 2017–09
  9. By: Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia
    Abstract: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico matched with firm and bank data, and by exploiting foreign monetary policy shocks in a country with a large presence of European and U.S. banks. The robust results show that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock mainly affects supply via their respective banks, in turn implying strong real effects, with lower elasticities from QE. The impact of low foreign monetary policy rates and expansive QE is stronger on local borrowers with higher ex-ante loan rates -reach-for-yield- and with higher ex-post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest spillovers of core-countries´ monetary policies on emerging markets, both in the foreign monetary softening and tightening part.
    Keywords: Monetary policy;financial globalization;quantitative easing (QE);credit supply;risk-taking;foreign banks
    JEL: E52 E58 G01 G21 G28
    Date: 2017–09
  10. By: Fausto Pacicco; Luigi Vena; Andrea Venegoni
    Abstract: The literature on the evaluation of how the well-being is measured is full of different contributions, ranging from the subjective measure, to the batch of indicators approach, to the provision of synthetic objective indexes. However, up to date, there is still a lack of such measures on micro-territorial level, i.e. on town-by-town basis. This paper, thanks to the statistic platform 100% Lombardia, aims to develop such indexes, named WIT (Well-being Index for Towns), using a cluster analysis, a Bayesian dynamic factor model and a Panel-FAVARX.
    Date: 2017–07
  11. By: Erick Lahura (Central Reserve Bank of Peru)
    Abstract: This paper investigates empirically the usefulness of monetary aggregates as information variables in the conduct of monetary policy. For this purpose, some recent advances on the topic were used, which include the analysis of both real-time and revised final data, and the application of Bayesian model averaging to allow for model uncertainty regarding the lag length and number of cointegrating relationships. In this paper, money is considered as an information variable for Wt (e.g. output or prices) if the following two criteria are satisfied: (i) Mt is strongly exogenous, and (ii) Mt Granger-causes Wt. Strong exogeneity is relevant because it validates conditional forecasting of Wt using monetary aggregates as conditioning variables. The results show no strong evidence supporting the usefulness of monetary aggregates as information variables for prices or output. However, this does not preclude their potential use as information variables for other macroeconomic targets such as financial stability.
    Keywords: Bayesian Model Averaging, cointegration, Granger causality, monetary aggregates, monetary policy, real-time data, strong exogeneity.
    JEL: C32 E52 E58
    Date: 2017–08
  12. By: Juraj Zeman (National Bank of Slovakia); Biswajit Banerjee (Bank of Slovenia); Ludovit Odor (EU Independent Fiscal Institution); William O. Riiska Jr. (Hutchin Hill Capital)
    Abstract: Based on intra-day high-frequency data, this paper investigates the effect of sterilized interventions on the Slovak koruna/euro exchange rate for different time windows during a period that coincides with Slovakia’s preparation for EU accession and euro adoption. Results confirm a significant relationship between intervention and exchange rate change. The maximum effect of intervention is reflected in the exchange rate change within a couple of hours and the effect over longer time windows weakens only gradually. The initial impact of sales interventions is stronger than that of purchase interventions.
    Keywords: Foreign exchange market intervention, koruna/euro exchange rate, monetary policy framework, ERM II participation, Slovakia
    JEL: E44 E58 F31 G15
    Date: 2017–09
  13. By: Marcello Miccoli (Bank of Italy); Marianna Riggi (Bank of Italy); Lisa Rodano (Bank of Italy); Laura Sigalotti (Bank of Italy)
    Abstract: Assessing underlying inflation developments is crucial for a correct calibration of the monetary policy stance. To monitor the adjustment in the path of euro area inflation towards the ECB’s definition of price stability, we select a number of indicators of price dynamics in the area. We then construct a composite index summarizing the information contained in those indicators by estimating several univariate probability models. The index, which provides a synthetic measure of inflationary pressures net of the most volatile components, can be interpreted as gauging the probability of inflation returning to 1.9 per cent or over within a given time horizon. Our findings, which are based on the information available in July 2017, signal that, despite the improvement in price dynamics since the beginning of the year, the adjustment of inflation rates towards levels below, but close to, 2 per cent over the medium term is still limited and far from being sustained.
    Keywords: euro area, determinants of inflation, inflation, statistical aggregation
    JEL: C35 C38 E31 E58
    Date: 2017–09
  14. By: Lewis, Vivien; Roth, Markus
    Abstract: The European Central Bank's asset purchase programs, while intended to stabilize the economy, may have unintended side effects on financial stability. This paper aims at gauging the effects on financial markets, the banking sector, and lending to non-financial firms. Using a structural vector autoregression analysis, we find both in the euro area and in Germany a positive effect on output, while prices do not respond significantly. Asset purchases reduce financial stress, but this beneficial effect is overturned in the medium run. In Germany, implicit firm default rates rise, while loan write-offs by banks decrease. This could point to an avoidance of balance sheet repair in the financial sector.
    Keywords: asset purchase programs,balance sheet,monetary policy,central bank,shock identification,VAR
    JEL: C32 E44 E52 E58
    Date: 2017
  15. By: Daniel Kaufmann
    Abstract: Measurement error in historical data distorts descriptive analyses based on binary classifications. Modern replications of deficiencies in retrospective CPI estimates for the 19th century show that measurement issues cause misclassification of inflationary and deflationary episodes. We therefore underestimate the shortfall in real activity during deflation. Using various approaches to control for measurement error in 19th century US CPI data, a series of stylized facts emerge: (i) Real activity was on average substantially lower during deflations; (ii) CPI deflations were associated with at least as severe shortfalls in real activity as equity price declines and banking crises; (iii) Only severe deflations were associated with declines in real activity; (iv) Transitory and persistent deflations, as well as, monetary and nonmonetary deflations were equally associated with lower GDP growth.
    Keywords: Deflation, real activity, monetary history, measurement error, binary regressors, misclassification bias, bounds, GMM
    JEL: E31 E32 N11 C2
    Date: 2017–09
  16. By: Dagfinn Rime (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Andreas Schrimpf (BIS and CEPR); Olav Syrstad (Norges Bank (Central Bank of Norway))
    Abstract: This paper studies the violation of the most basic no-arbitrage condition in international finance — Covered Interest Parity (CIP). We find that the CIP puzzle largely stems from funding liquidity differences, reflected in the marginal funding rates of the main arbitrageurs. With severe funding liquidity differences, it becomes impossible for FX swap intermediaries to quote prices such that CIP holds across the full rate spectrum. A narrow set of global top-tier banks enjoys risk-less arbitrage opportunities as dealers set quotes to avert order flow imbalances. A situation with persistent arbitrage opportunities emerges as an equilibrium outcome due to the constellation of market segmentation, the abundance of excess reserves and their remuneration in central banks’ deposit facilities.
    Keywords: Covered Interest Parity, Money Market Segmentation, Funding Liquidity Premia, FX Swap Market, U.S. Dollar Funding
    JEL: E43 F31 G15
    Date: 2017–09–06
  17. By: Nachane, Dilip M (Indira Gandhi Institute of Development Research); Aditi Chaubal (Australian Consulate General, Mumbai)
    Abstract: The Laspeyres-type consumer price index (CPI) is traditionally used to measure the changes in cost-of-living over time. Studies indicate this CPI suffers from a plutocratic bias, attaching greater weightage to expenditure by rich compared to poor; while democratic CPI uses equal weights. We calculate the plutocratic bias for the new Indian CPI (launched in 2012), rural and urban CPI, and CPI of three Indian states from 2012-2015. We develop democratic CPI indexes for commodity groups: necessities, luxuries, housing and others; and separate indexes for three consumption brackets. Our analysis has important implications for monetary policy and indexation of transfer payments.
    Keywords: Laspeyres index numbers, plutocratic bias, democratic CPI, expenditure elasticity, consumption brackets, India
    JEL: E01 E3 E31 E52
    Date: 2017–08
  18. By: Pavel Gertler (National Bank of Slovakia); Roman Horvath (Charles University)
    Abstract: This paper examines the financial market impact of intermeeting communication of the members of the European Central Bank’s Governing Council (GC) using high frequency data in the period 2008–2013. Constructing a rich dataset of GC members’ public statements (speeches, conference discussions and media interviews) between monetary policy meetings allows us to investigate a detailed pattern of market responses to the ad-hoc communication of central bankers. Using least squares and quantile regressions, we document the impact of policymakers’ public statements on interest rates and the stock market with very little or no impact on exchange rates. In general, we find little evidence that the timing, sequencing or content of communication matters in immediate response. On the contrary, the results suggest that the market concentrates on the communication of key members of the committee.
    Keywords: Central bank, communication, European Central Bank
    JEL: C1 E5 G21
    Date: 2017–06
  19. By: Adriana Lojschova (National Bank of Slovakia)
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual banklevel data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–06
  20. By: Salim, DEHMEJ (Bank Al-Maghrib, Département de la Recherche); Leonardo, GAMBACORTA (Bank for International Settlements (BIS))
    Abstract: Using a simple New Keynesian model of a monetary union that incorporates financial frictions, we show that country-targeted macroprudential policy could complement a single monetary policy at the union level. In particular, macroprudential policy helps taming financial and economic imbalances in presence of countercyclical financial shocks and imperfect transmission of monetary policy to financial conditions in a monetary union. These results are even stronger when different economies are hit by asymmetric shocks that cancel out without provoking any monetary policy reaction. In addition, we show that when coordinated with monetary policy, country-targeted macroprudential policy (implemented by national or supranational authorities) has advantages over a federally implemented policy that reacts to average financial indicators.
    Keywords: Monetary Union; Macroprudential Policy; New-Keynesian Model
    JEL: E12 E50 G18
    Date: 2017–09–07
  21. By: Adam, Klaus; Weber, Henning
    Abstract: We present a sticky-price model incorporating heterogeneous firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous firms: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.
    Keywords: optimal inflation rate,sticky prices,firm heterogeneity
    JEL: E52 E31 E32
    Date: 2017
  22. By: Francisco Ruge-Murcia (McGill University); Jinill Kim (Korea University)
    Abstract: This paper studies the positive and normative implication of extreme shocks for monetary policy. The analysis is based on a small-scale New Keynesian model with sticky prices and wages where shocks are drawn from asymmetric generalized extreme value (GEV) distributions. A nonlinear perturbation of the model is estimated by the simulated method of moments. Under both the Taylor and Ramsey policies, the central bank responds non-linearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above $1$ as insurance against extreme shocks, and strict price stability is unambiguously solved in favour of the latter.
    Date: 2017
  23. By: Punzi, Maria Teresa; Rabitsch, Katrin
    Abstract: We study the impact of macroprudential policies using a novel model which takes into account households´ ability to borrow under different loan-to-value ratios which are tied to their collateral values. Such model generates a larger amplification in real and financial variables, compared to standard models that assume homogeneity in the leveraging and deleveraging process. Conditional on this model, we consider the implications of macroprudential policies that aim to lean against an excessive credit cycle. In particular, we allow macroprudential authorities to tighten excessive lending to higher leveraged households, whose riskiness had been evaluated too optimistically. We find thata policy that targets only the group of households that most strongly deleveraged after an adverse idiosyncratic housing investment risk shock, is welfare-improving at social and individual levels, relative to a macroprudential policy which targets all households in the economy.
    Keywords: Endogenous Loan-to-Value ratio, Heterogeneity, Macroprudential Policy
    Date: 2017–09

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